Related tickers: American International Group Inc (NYSE:AIG), Citigroup Inc (NYSE:C)
Remember when a look at the five year stock chart for almost any investment was a sickening reminder of what your investments used to be? For the years since the market collapse, a long term (five year) look showed the cratering of the value of most investments and a piece of their subsequent rebound. But at the same time as we see the Dow Jones and S&P 500 reaching all time highs, we will soon see the wreckage from the past disappearing in our supposedly long term view of the markets.
Five year chart? Why a five year chart?
Now some of you may be saying something like “Hey Mr. Author, who cares about a five year chart? Isn’t every other chart just as important?” Well, I can assure you, I haven’t been writing one of these articles every year since the crash. I am only writing one for the five year mark.
For many investors, five years is a reasonable length for a long term investment. It helps to average out market fluctuations and makes investors more than eligible for the long term capital gains tax rate. With a view of looking at past performance, investors who visit the previously mentioned websites will often choose the longest timeframe available, thus viewing a five year chart.
Financials look awful
Looking at the current five year chart, we can see how terrible of an investment American International Group Inc (NYSE:AIG) would have made five years ago. A quick view shows shares trading at split-adjusted levels of $800 per share back in April of 2008. Even with this figure, a five year chart no longer shows the full extent of the damage. Extending the chart to a ten year timeframe, we see that AIG consistently traded well above a split-adjusted $1000 per share in 2007 and the years prior. With shares trading around $40 per share as of Apr. 11, the five year chart gives the impression of AIG as a complete failure as a company.
A similar phenomenon can be observed in Citigroup Inc (NYSE:C) shares. Switching hands at around $44 per share as of Apr. 11, the five year shows Citigroup Inc (NYSE:C) falling from a split-adjusted $250 per share to the level it’s at today. But, like American International Group Inc (NYSE:AIG), shares of Citigroup were even higher back in 2007 when they topped a split-adjusted $500 per share as the bubble was fully inflated.
Even Bank of America Corp (NYSE:BAC), which has left pre-recession investors licking their wounds, is having its greatest highs of over $50 per share removed from the charts. Now the high point in a five year chart is made up of a couple brief runs to the $40 level. Closing at $12.27 on Apr. 11, 2013, shares are still far from their previous highs.
Scary charts, new investors
There are few times we can look at a stock chart as terrible as those of the post-meltdown financial powerhouses and not hesitate a little before throwing our money in the ring. Likewise, there are many investors who take a look at the chart and dismiss the idea of investing in financials without giving them full consideration.
When these institutions began to fall, they drove away many categories of investors and gained a few new ones. When the initial failure was beginning, the most conservative investors began to flee with more of their kind leaving as the extent of the damage became more apparent. To conserve capital, these companies were forced to slash their dividends driving away income investors hungry for their quarterly payouts. (For reference, Bank of America Corp (NYSE:BAC) and Citigroup Inc (NYSE:C) currently pay a token one cent per quarter and American International Group Inc (NYSE:AIG) is looking to reinstate a dividend in the near future). Replacing the conservative and income investors, were speculators and value investors who began to accumulate shares of beaten-down financials.
Now, financials are often cited as value stocks based on historical share prices and low price to book ratios. Many of the conservative investors remain on the sidelines as uncertainty is still a thorn in the side of this industry and income investors are not willing to return to collect the measly penny per quarter.
But by the end of this year, the fairly ubiquitous five year chart will only display post-crash share prices. With the crash wiped off the chart, a small percentage of conservative investors may begin to return as the chart appears more stable (even though the change in the chart in no way strengthens the companies). By this time, these companies may have raised their dividends to respectable levels once again (a factor independent of the charts) attracting some income investors back as well.
Forgetting the fallout
Today, a look at the five year charts of any of these companies serves as a cautionary reminder of the financial disaster these companies helped to bring on the economy. But already some of the effect is being erased with the greatest high marks from before the crisis disappearing off the left of the chart. In some ways, it is a sign that we are recovering from the worst of the market but it could cause some investors to begin unconsciously forgetting about the collapse. Followers of Bank of America Corp (NYSE:BAC), Citigroup Inc (NYSE:C), and American International Group Inc (NYSE:AIG) need not be reminded of the share price collapse, slashing of the dividend, and massive share dilution. For those not involved in the world of financial stocks, it is best to look beyond the five year mark to gain a better understanding of why these companies are where they are now. Personally, I am bullish on the recovery prospects for the financial companies mentioned here by maintaining them as value stocks, not conservative or income investments, at least while the dividends remain low. As always, a little look beyond the norm is good to help you fulfill a top rule of investing:Know what you own.
Alexander MacLennan has no position in any stocks mentioned. The Motley Fool recommends American International Group Inc (NYSE:AIG). The Motley Fool owns shares of American International Group, Bank of America Corp (NYSE:BAC), and Citigroup Inc and has the following options: Long Jan 2014 $25 Calls on American International Group
